A Primer for the Pinterest Public Offering on Thursday

The company is a total ROI story, but can it share positive returns with IPO investors?

In a year packed with tech "unicorns" hurrying to make an offering, the next to the NYSE on Thursday is Pinterest (PINS) .

The San Francisco-based social media and mobile application company appears confident as the price of the listing has been raised to $19 per share, up from initial expectation that pegged shares in the $15 to $17 range in the company's S-1 filing with the SEC.

Investors willing to play the unicorn stock on its first day of trading are betting on a big growth story that will be fueled by the anticipation of advertising and e-commerce players paying up for space on the platform that predicates its business on users called "pinners" actually purchasing the products it "pins" as interesting.

"Pinterest is a total ROI story," Santosh Rao, Head of Research at Manhattan Venture Partners said. "Advertisers love it because it taps into a very compelling demographic group, which is women, 18 to 35 years of age."

He noted that the company is potentially more appealing to advertisers not only for the key demographic slice it targets, but for the behavior of its users that typically use the websites "pins" as a sort of wish list. The wish list nature of the interaction makes it much more suggestive of consumption, giving it a behavioral edge on the Facebook (FB) and Twitter (TWTR) advertising models that have much larger user bases, but less correlation to online purchases.

"These are highly motivated users, they tend to buy, they tend to act," Rao explained. "The advertisers get the views that they want, and they get the return on their investment."

That growth story on the back of advertisers is exactly what the company is looking to tap into in its growth strategy, which has shown rapid growth in recent years.

The user base for the company has grown to 291 million monthly active users, a user base comparable to Snap (SNAP) , while increasing average revenue per user by about 25% in the past year. Longer term, global average revenue per user has increased from $0.39 in the first quarter of 2016 to $1.06 in the fourth quarter of 2018.

The steady increase in revenue generation per user helped the company increase revenue from $298.9 million in 2016, to $472.9 million in 2017, to $755.9 million in its last year of private operation.

Path to Profitability

Despite the positive revenue trend, the company has not yet shown an ability to achieve profitability, following the trend of many unicorn names before it.

"We have incurred operating losses in the past, anticipate increasing our operating expenses, expect to incur operating losses in the future and may never achieve or maintain profitability," the company's S-1 filing warns. "Operating expenses will increase substantially in the foreseeable future as we continue to expand our operations domestically and internationally, enhance our product offerings, broaden our Pinner and advertiser base, expand our marketing channels, hire additional employees and develop our technology. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses."

In its last two years of operation, the company did trend toward profitability, cutting its net loss in half.

"We generated net losses of $130.0 million and $63.0 million for the years ended December 31, 2017 and 2018, respectively," company filings reveal. "As of December 31, 2018, we had an accumulated deficit of $845.4 million."

The better path to profitability came despite a 32% increase in the company's workforce, possibly alleviating some concern on the drag increased spending could spell for the stock.

In order to climb to profitability amid aggressive expansionary spending, the company will need to accelerate its growth and avoid the hiccups experienced by a similarly positioned company like Snap.

"To hit our numbers, Pinterest's management will need to improve its ad tech over time and increase its international monetization," DA Davidson analyst Tom Forte said. "Given management's success, to date, in building the platform, with a global audience of more than 250 million monthly active users and monetizing its U.S. efforts, with more than $1 billion in sales in 2018, we have a high degree of confidence in its ability to achieve those goals."

Nonetheless, Forte retained his "Neutral" rating on shares and a price target at $16.50, in the middle of the initial range, heading into the listing on Thursday.

Shares are set to begin trading shortly after the open on Thursday, where demand will end up determining whether the company is more aligned with surging unicorn stocks like Jumia Technologies (JMIA) or lagging like Lyft (LYFT) .

Big institutions have been cutting the stock since even the last earnings report.

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